Beruflich Dokumente
Kultur Dokumente
Balance Objectives
Existence. Accounts payable represent amounts owed to vendors at the balance sheet date (EO4).
Completeness. Accounts payable includes all payments owing to vendors at the balance sheet date (C4).
Rights and Obligations. Accounts payable are obligations of the entity at the balance sheet date (RO1).
Valuation and Allocation. Accounts payable are correctly stated at the amounts owed (VA4).
Disclosure Objectives
Occurrence and Rights and Obligations. Disclosed purchase cycle events and transactions have occurred and
pertain to the entity (PD4).
Completeness. All purchase cycle disclosures that should have been included in the financial statements have
been included (PD5).
Classification and Understandability. Purchase cycle information is appropriately presented and described and
information in disclosures is clearly expressed (PD6).
Accuracy and Valuation. Purchase cycle information is disclosed accurately and at appropriate amounts (PD7).
15-3. The purchases cycle is material to most manufacturing, wholesaling, and retailing
organizations. Purchases of inventory are usually material to the financial statements
taken as a whole. Costs of manufacturing may be affected by technological change and
may not be consistent from one year to the next. When purchases are so high in volume
and have such a significant effect on the financial statement, the auditor will want to
understand the system of internal control and hopefully plan a lower assessed level of
control risk approach.
Solutions Manual to Modern Auditing: Copyright
15-1
On the other hand, purchases may be relatively insignificant to a school district. Payroll,
rather than expenditures for goods or purchased services, may account for over 85% of
operating costs. Recurring costs such as utilities and maintenance are borderline material
and these amounts may be quite predictable. In these cases there may be a low inherent
risk associated with expenditures and their predictability may allow for an emphasis on
analytical procedures. However, the auditor will usually use a primarily substantive
approach when searching for unrecorded liabilities.
15-4. Materiality is probably going to be a factor because expenditure cycle transactions affect
more financial statement accounts than the other cycles combined. For example, the
expenditure cycle may affect a number of expense and asset accounts while the revenue
cycle primarily affects sales and accounts receivable. Moreover, these transactions affect
account balances that normally have a material effect on the balance sheet and income
statement. In a few instances with some service organizations, payroll costs (see Chapter
16) are the primary cash outflow and expenditures may be less significant.
15-5. a.
b.
Industry factors may impact the trade terms related to accounts payable. Some
companies are also able to manage their operating cycle such that they can turn
their inventory and collect from customers before the have to pay their suppliers.
Some made to order business often collect customer deposits prior to recognizing
revenues resulting in a nonmonetary liability for deferred revenues. In some
industries that are capital intensive, current liabilities may not be as significant as
long-term debt.
c.
d.
15-2
15-6. a.
Calculation
Avg. Accounts Payable Purchases x 365
Cost of Goods Sold Accounts Payable
b.
15.7.
Key elements of the control environment that are relevant to initiating and recording
purchases:
A commitment by senior management to integrity and ethical values, particularly as it
relates to pressures on purchasing agents who may be offered kickbacks for
transacting business with vendors.
A commitment to competence should be reflected in the hiring, assigning, and
training of personnel involved in processing purchases and cash disbursements.
The assignment of authority should require clear accountability for expenditures and
such accountability should implemented on a timely basis.
15-8. a. Function
Authorizing vendors
Initiating purchases
b. (1) Department
Stores and other
departments
Stores or other
departments
Purchase requisition
Purchasing
Purchase order
Open purchase order file
Receiving report
Receiving file
(2)Document/Record
Authorized vendor file
Accounting accounts
payable
15-3
file.
Various suspense files
15-4
15-9.
a
Potential Misstatement
Vouchers may not be
recorded for goods
received.
Vouchers may be
prepared for goods not
order or received.
Potential Control
The computer prepares an
exception report of goods
received that are not matched
with a voucher.
The computer checks for
receiving of goods prior to
processing a voucher.
Goods are safeguarded and a
perpetual inventory is kept.
Physical goods are compared to
perpetual records on a regular
basis.
Receiving must check for
authorized purchase order prior
to receiving goods.
15-10. Usually a company will create an accounts payable master file that lists payables by due
dates. Daily an individual with responsibility for treasury functions will check the
amounts that come due that day with cash availability and will authorize particular
liabilities to be paid. Prior to issuing a check a computer control will ensure that a proper
voucher has been recorded. Also, batch totals for amounts authorized and the amount of
the check run will also be compared prior to processing. Finally checks will usually be
compared with an authorized check list by an independent person.
15-5
15-11.
Control
Potential
Misstatement
Test of Control
Examine evidence of use of
and accounting for
prenumbered checks
Inquire about mailing
procedures and observe
mailing.
Use CAATs to test the control
by submitting data that should
be rejected by the control.***
Use CAATs to test the control
by submitting data that should
be rejected by the control.***
15-12. a.
b.
15-6
15-13. a.
b.
Most companies control the completeness (C4), existence (EO4) and valuation of
receivables at historical cost (VA4) by reconciling the accounts payable subsidiary
ledgers with vendor statements.
c.
Controls over the rights and obligations assertion relate to whether the payables
are the obligation of the entity. This is usually controlled when the liability is
recorded by matching the voucher information with supporting data (RO1).
d.
15-14. The following table provides example controls and tests of controls for each assertion
(and transaction level audit objective) related to purchases and cash disbursements.
Examples emphasize programmed control procedures where appropriate. Student should
note that tests of controls should also emphasize testing computer general controls,
observing exception reports, and testing manual follow-up of items that appear on
exception reports.
Purchases
Assertion (Audit Objective)
Existence and Occurrence
(Occurrence)
Control
The computer checks for receiving of
goods prior to processing a voucher.
Completeness
(Completeness)
Test of Controls
Use CAATs to test the control by
submitting data that should be rejected by
the control.
Use CAATs to test the control by
submitting data that should be rejected by
the control.
Use CAATs to test the control by
submitting data that should be rejected by
the control.
Use CAATs to test the control by
submitting data that should be rejected by
the control.
Use CAATs to test the control by
submitting data that should be rejected by
the control.
Use CAATs to test the control by
15-7
Cash Disbursements
Assertion (Audit Objective)
Existence and Occurrence
(Occurrence)
Control
Computer compares check information
with supporting voucher information.
Completeness
(Completeness)
15-15. a.
b.
15-16. a.
Test of Controls
Use CAATs to test the control by
submitting data that should be rejected by
the control.
Use CAATs to test the control by
submitting data that should be rejected by
the control.
Observe and test the accuracy of
independent bank reconciliations.
Use CAATs to test the control by
submitting data that should be rejected by
the control.
Use CAATs to test the control by
submitting data that should be rejected by
the control.
Use CAATs to test the control by
submitting data that should be rejected by
the control.
15-8
b.
15-17. Disagree. Unlike the presumption that accounts receivable will be confirmed with limited
exceptions, there is no such presumption about the confirmation of accounts payable.
This test is optional because (a) confirmation offers no assurance that unrecorded
payables will be discovered, and (b) external evidence in the form of invoices and vendor
monthly statements should be available to substantiate the balances. Confirmation of
accounts payable is recommended when control risk is high, there are individual creditors
with relatively large balances, and when a company is experiencing difficulties in
meeting its obligations.
15-18.a.
1.
2.
b.
Both tests provide evidence for the existence or occurrence and completeness
assertions for accounts payable.
15-19. a.
b.
In examining subsequent payments, payments after the balance sheet date are
vouched to supporting documentation, and if an obligation is found to have been
in existence at year-end, it is traced to the accounts payable listing. This is an
important test for the completeness assertion.
15-9
c.
In determining whether payables are properly identified and classified, the auditor
is concerned with the type of payable (such as whether payable to a vendor,
employee, or related party), and the expected period of payment (e.g., whether
current or noncurrent). This test relates to the presentation and disclosure
assertion.
15-20. Some examples of other assurance services that an auditor might consider include:
Recommendations on how to improve cash flow and best-in-class activities
associated with payment of accounts payables.
Recommendations on the economic consequences of potential contracts on cash flows
and payables.
Comprehensive Questions
15-21. (Estimated time - 15 minutes)
Purchases and accounts payable are material transactions for an independent grocer. An
independent grocer probably does not purchase directly from manufacturers and will not
have a significant investment in the supply chain the way a major grocery chain will, but
it will have a network of vendors that supply goods. The auditor will need to understand
these vendor relations and how goods are ordered and priced. Significant inherent risks
associated with an independent grocer include:
Concerns about accounting for advertising allowances and other price concessions to
stock merchandise on grocery shelves.
Concerns about purchases cutoff at month-end.
Concerns about potential unrecorded liabilities.
15-22. (Estimated time - 15 minutes)
The concurrent decline in inventory turn days and gross margins gives rise to a concern
about inventory shrinkage. It is possible that inventory that is purchased from vendors is
not being sold to customers, but is subject to employee theft. This would explain what
appears to be a faster turn of inventory, combined with the lower margins (no sales prices
associated with inventory reductions).
15-10
The following table provides the solutions to the quantitative requirements of 1523.
b.
The decrease in account payable turn days, the increases in the ratio of costs of
goods sold to accounts payable and the current ratio indicate a potential for
unrecorded liabilities and the understatement of accounts payable. As a result the
audit team needs to pay significant attention to the completeness assertion for
accounts payable. Given the results of analytical procedures the audit team should
consider a primarily substantive approach emphasizing tests of details when
performing a search for unrecorded liabilities.
15-11
Inventory may be overstated and the cost of merchandise sold and income may be
misstated because additions to inventory may be based on suppliers' invoices
which may include nonusable items or items that were not received. Further,
because the company may have erroneously recorded nonusable items or items
not received, accounts payable may be overstated.
15-12
15-13
The accounts payable audit procedures should be directed toward searching for
proper inclusion of all accounts payable and ascertaining that recorded amounts
are reasonably stated because the primary audit purpose is to reveal any possible
material understatements.
The principal specific audit objectives for accounts payable are:
Recorded accounts payable represent amounts owed by the entity at the
balance sheet date (existence or occurrence).
Accounts payable includes all amounts owed by the entity to suppliers of
goods and services at the balance sheet date (completeness)
Accounts payable are obligations of the entity at the balance sheet date (rights
and obligations)
Accounts payable are stated at the correct amount owed (valuation or
allocation).
Accounts payable are properly identified and classified in the financial
statements and disclosures pertaining to commitments, contingent liabilities,
15-14
and collateralized and related party payables are adequate (presentation and
disclosure).
b.
c.
A selection technique using the large dollar balances of accounts is generally used
when the primary audit objective is to test for overstatements (e.g., accounts
receivable audit work). Accounts with zero balances or relatively small balances
would not be subjected to selection under such an approach. When auditing
accounts payable, the auditor is primarily concerned with the possibility of
unrecorded payables or understatement of recorded payables. Selection of vendor
accounts with relatively small or no balances for confirmation is the more
efficient direction of testing since understatements are more likely to be detected
when examining such accounts.
When selecting accounts payable for confirmation the following procedures could
be followed:
Analyze the accounts payable population and stratify it into accounts with
large balances, accounts with small balances, accounts with zero balances, etc.
Use a sampling technique that selects items based on criteria other than the
dollar amount of the item (e.g., select based on terminal digits, select every
nth item based on predetermined interval, etc.).
Design a statistical sampling plan that will place more emphasis on selecting
accounts with zero balances or relatively small balances, particularly when the
client has had substantial transactions with such vendors during the year.
Select prior-year vendors who are no longer used.
Select new vendors used in the subsequent period.
Select vendors that do not provide periodic statements.
Select accounts reflecting unusual transactions during the year.
Select accounts secured by pledged assets.
15-15
The fact that the client made a journal entry to record vendors' invoices which
were received late should simplify the CPA's test for unrecorded liabilities and
reduce the possibility of a need for a further adjustment, but the CPA's test is
nevertheless required. Clients normally are expected to make necessary
adjustments to their books so that the CPA may examine statements which the
client believes are complete and correct. If the client has not journalized late
invoices, the CPA is compelled in his testing to substantiate what will ultimately
be recorded as an adjusting entry. In this examination the CPA should test entries
in the 19X1 voucher register to ascertain that all items which according to date of
receiving reports or vendors' invoices were applicable to 19X0 have been
included in the journal entry recorded by the client.
b.
No. The CPA should obtain a letter in which responsible executives of the client's
organization represent that to the best of their knowledge all liabilities have been
recognized. However, this is done as a normal audit procedure to afford additional
assurance to the CPA and it does not relieve him of the responsibility for making
his own tests.
c.
d.
Work done by an auditor for a federal agency will normally have no effect on the
scope of the CPA's audit, since the concern of government auditors is usually
limited to matters which are unrelated to the financial statements. Nevertheless
the CPA should discuss the government auditor's work program with him, as there
are isolated situations where specific procedures followed to a satisfactory
conclusion by a government auditor will furnish the CPA with added assurance
and therefore permit him to curtail certain work in a particular area. However,
government auditors are usually interested primarily in substantiating as valid and
allowable those costs which a company has allocated against specific government
contracts or sales to the government, and consequently there is little likelihood
that the auditor for a federal agency at Ozine would check for unrecorded
liabilities.
e.
In addition to the 19X1 voucher register, the CPA should consider the following
sources for possible unrecorded liabilities:
15-16
15-17
Cases
15-31.
Phase I
This case allows the professor to explore the challenges of auditing privately held companies.
While privately held companies do not receive the same attention of public companies, they
represent a significant portion of audits performed by CPAs. This case allows students to
explore the control environment issues associated with owner-manager companies, typical
challenges associated with segregation of duties, and the challenges associated with the
implementation of electronic data interchange (EDI) in the owner-managed company
environment. Finally, this case also explores issues associated with the potential for
misappropriation of assets that is increasingly common in owner-managed companies.
Question 1: Control Environment Issues
The control environment at CIRI is representative of that in a number of owner-managed
businesses. The following issues all represent control environment weaknesses.
Les Browning owns a majority of the business and is focused on growing sales and profits.
Les has focused attention on customer relations and then on growing revenues in the lumber
brokerage business. His emphasis on marketing and operations has resulted in neglecting
accountability and financial reporting.
Les Browning has delegated oversight of accounting issues and internal controls to his
controller, who is not a CPA, and Les is price conscious about salaries and costs of overhead
issues such as accounting.
Tangible evidence of the lack of attention paid to the accounting system is that Les is
satisfied with having a balance sheet and income statement on a monthly basis with a lag
time of 15-20 days after month-end (Note that management uses neither cash flow
projections nor a statement of cash flows on a regular basis.).
Further evidence of the lack of control environment is the fact that the company has not
developed budgets and accountability at the store level for financial results is informal.
Senior managements philosophy and operating style has focused on the top line and had not
attended to the details of day-to-day expenditures.
Les Browning has delegated responsibility for the accounting system to Craig Ferris, but
there is no significant accountability for results in place. Craig Ferris has delegated the
implementation of the EDI system to Dennis Brewer, again with no formal accountability for
implementation.
This is also a good time to discuss the implications of a weak control environment on audit
strategy. Even if control activities were present there is a reduced likelihood that controls will be
operating effectively. Hence, the auditor will follow probably follow a primarily substantive
approach for all significant assertions in material account balances and transaction classes.
Question 2: Analytical Procedures.
Solutions Manual to Modern Auditing: Copyright
15-18
The symptoms of decreasing inventory turn days and the decline in gross margins are consistent
with the problems of inventory shrinkage. The decrease in inventory turn days shows that there
is an increased volume of cost of sales relative to inventory. If margins drop at the same time,
one possible scenario is that inventory is going out the door and the company is not collecting
from customers for that inventory.
Question 3: Risk Assessment
Background: The auditor should consider the risk of fraud at the financial statement level in
every audit. Further, recent Statements on Auditing Standards make it clear that an auditor of a
smaller business should not merely default to a primarily substantive approach without
considering the factors that influence the risk of material misstatement. A small entity may use
sophisticated applications of IT in its information systems. In such circumstance the auditor may
need to perform more extensive audit procedures to obtain an understanding of the entity and its
environment sufficient to identify and assess risks of material misstatement of the financial
statements.
Finally, faculty may want to open a discussion of the challenges of auditing EDI systems that
leave no documentary audit trail. Following are some of the more prevalent risks of EDI
systems:
Accuracy of data increased or unauthorized access to the companys system and
programmed data could enable a user to manipulate the company or suppliers transactions.
Additionally, the company may rely heavily on programmed data and therefore the
programming must be tested and reviewed for errors and timeliness as it can affect
production cycles, delivery timing, margins, and other factors.
Segregation of duties control may be placed with a reduced number of individuals in the
company therefore reducing the internal control over transactions.
Systems of other parties involved the information system of the other party involved in
electronic transactions must also be questioned as weaknesses in their controls can still
expose a company with strong controls to risks of misstatement.
Corrupt system an EDI application that has been corrupted could expose the business to
inaccurate transactions leading to losses to the business, customers, and/or suppliers. This
could translate not only into immediate losses in individual transactions, but also loss of
consumer confidence, legal issues, and business decisions made based on inaccurate data.
Disclosure of confidential information to external parties a breach of the companys
network through unauthorized access could disseminate confidential information.
Emergencies and system failures when relying predominately on the system for business
operations, the company should have good back up and recovery procedures in the event of a
system failure.
Although an EDI environment poses many challenges, it also contributes significant audit
advantages. Some of those include:
Accounts such as receivables, payables, and inventory should be reduced at year-end
compared to a non-EDI environment, due to the increased speed of transaction processing
from initiation of a transaction through providing consideration for the transaction.
15-19
The clients use of EDI might influence the audit approach in the following ways.
When accepting an engagement and planning an audit, the auditors should consider the following
initial points:
The auditor must be well informed about the business and industry and have developed
strong expectations for a companys financial data.
Due to the lack of a paper trail, a controls based audit approach is likely more efficient than a
substantive approach. Increasing the level of understanding of the clients system that often
goes with planning to perform tests of controls will help the auditor assess the risk of
material misstatement in a system that does not offer a significant paper trail. The auditor
will usually want to understand and test the following controls in an EDI system.
Authentication of transactions
Encryption of data
Security of system
Back up and recovery procedures
Documentation of application or procedural changes
Computer assisted audit techniques (CAATs) should be considered since the auditor could
obtain significant coverage of data in an efficient manner. If an audit firm is concerned about
the CAATs skills demonstrated by the firms auditors is should question whether to retain a
client who is using EDI for transactions that will have a material impact on the financial
statement assertions.
The auditor might also consider using IT based tests such as integrated test facilities or
embedded audit modules. These options should be considered at the time a system is
designed, as it is difficult to implement after a system is complete and operating.
Integrated test facility an entire set of fictitious data is input to the system in
order to test the controls and output.
Embedded audit module this option provides continual audit procedures
since the audit tests are built into the application.
15-20
Incentives / Pressures
Existence and
occurrence of
purchases and
payables
Dennis is seeking
advancement, status,
and the increased
compensation that
would come with
promotion. Also, add
some financial
pressures from
having children in
private schools.
15-21
Control
Activities
Control
activities do not
exist due to
poor
segregation of
duties and
Dennis
Brewers
system access.
Possible Misstatements
There is a high risk of
inventory shrinkage,
particularly with respect to
drop-shipments. Dennis
Brewer controls the ability
to order goods, direct drop
shipments to delivery
locations, record receipt of
goods, and initiate
payments.
15-22
Date
To the Board of Directors
Construction Industry Resources, Inc.
In planning and performing our audit of the financial statements of Construction Industry Resources Incorporated for the
year ended December 31, 20x5, we considered its internal control in order to determine our audit procedures for the
purpose of expressing an opinion on the financial statements and not to provide assurance on internal control. However,
we noted certain matters involving the internal control and its operation that we consider to be reportable conditions
under standards established by the American Institute of Certified Public Accountants. Reportable conditions involve
matters coming to our attention related to significant deficiencies in the design or operation of internal controls that, in our
judgment, could adversely affect the organizations ability to record, process, summarize and report financial data
consistent with the assertions of management in the financial statements.
Segregation of Duties in the Purchasing Function
Dennis Brewer currently has electronic access to all phases of purchasing transactions in the EDI purchasing system
with Contractors Wholesale Supply. Hence, Mr. Brewer is in a position to initiate a transaction, authorize receipt of the
transaction, and record a payable that eventually will result in the payment of invoices to Contractors Wholesale Supply.
This presents a risk that Mr. Brewer could possibly initiate a purchase, have it drop shipped to almost any location,
record the receiving, and the process payment for the goods. Sound segregation of duties segregates the three major
functions; (1) authorizing transactions, (2) having custody and responsibility for receipt of goods, and (3) having
responsibility for recording transactions. Mr. Brewers access to the EDI purchasing system with Contractors Wholesale
Supply should be limited to functions necessary to accurately record purchases.
Controls over IT implementation
Dennis Brewer had complete responsibility for implementing the new EDI purchases system with Contractors Wholesale
Supply. In order to prevent risk associated with unauthorized alteration of programs or data system design and testing
should be separate those who have responsibilities in the system. Further, new systems implementation should involve
a variety of individuals from each function that is affected by the program. In addition to Mr. Brewer, it would be normal
to involve individuals who initiate purchases and individuals responsible for receiving goods in the testing phase of new
systems implementation. Someone with senior IT responsibilities should be responsibility for reviewing and testing Mr.
Brewers work. Only after representatives of each user function have approved the system should it be placed in
operation. The involvement of user departments in system design greatly reduces the risk of programs not meeting the
needs of user department and it provides checks and balances over the system design process.
Budgetary controls and accountability
Currently Construction Industry Resources, Inc. does not have a budgetary process were budget are developed for each
operating unit and actual results reported by the accounting system are compared with actual. Construction Industry
Resources, Inc. has grown to a sufficient size where budgets are cost effective. Developing a system where managers
are accountable for reported results encourages a higher level of attention to the accuracy of results reported by the
accounting system. We would recommend that Construction Industry Resources, Inc. establish budgets for each store
and for the lumber brokerage business. Managers of each responsibility center should then be held accountable for the
reasonableness of variations from planned performance. This will likely improve the operating efficiency of each
business unit and it will have a secondary benefit of having management review the accuracy of output from the
accounting system.
15-23
This report is intended solely for the information and use of the Board of Directors of Construction Industry Resources,
Incorporated, management and others within the organization and is not intended for any other purposes. We thank you
for the opportunity to continue to be of service to you.
Signature.
Phase II
Question 5: Analyzing the Results of Tests of Transactions. A number of issues are raised above.
The following notes address issues associated with internal controls and then issues raised by
substantive testing.
Internal Control Issues:
Exception reports are an important part of the audit trail. They are generated daily, and
various transactions may appear on the reports and then clear themselves. In this case they
may have provided evidence of drop shipments that had billings from BCWSC that had no
matching receiving reports. Dennis could clear these exceptions and throw away the
evidence. If all reports were maintained, and not just Wednesdays and Thursdays reports,
then a true audit trail is available for the auditor.
Exceptions noted in substantive test:
The first exception represents a potential valuation problem associated with a transposition
problem. CIRI ordered merchandise at one price ($167 per unit), yet it paid another price
($176 per unit). The difference for the transaction was $900 (100 units at $9 per unit). If
the auditor assumes that other items in the strata contain a proportionate number of
misstatements relative to the misstatements found in the sample, this results in projected
misstatements in the strata of $50,694. The auditor then needs to determine if the $50,694 is
sufficiently material to come forward to a possible adjustment summary to be aggregated
with other possible misstatements. The auditor might consider whether to take an
additional sample to ascertain the degree to which such misstatements appear in other
transactions and then evaluate the results of a larger sample.
The second issue forces students to confront some of the realities of inventory counts in
small business. In this case goods are received during the inventory count. Eventually they
are included in inventory and they are also included in purchases. The purchases are
recorded in the same period in which the goods were received so there the financial
statements are presented fairly with respect to this transaction.
The issue associated with the one drop shipment that was not billed to a customer is very
significant. The failure to bill customers is possibly evidence of inventory shrinkage, which
could be a serious problem particularly given the results of analytical procedures. This
may be a good place to discuss how students would look at an item that is individually
immaterial. Auditors need to consider both quantitative and qualitative issues when they
evaluate known audit problems. Quantitatively, if this failure to bill a customer for the drop
shipment is projected on the balance of the strata, the auditors estimate is that $308,997 of
goods at cost have not been billed to customers. Assuming a prior years gross margin of
19.1% this represents approximately $368,000 of lost revenues. Qualitatively this audit
evidence is the tip of the iceberg and students need to recognize that this is sufficient
evidence to ask the auditor to look at more drop shipments for similar problems. When the
Solutions Manual to Modern Auditing: Copyright
15-24
auditor considers this problem together with the risks associated with Dennis Brewer having
unlimited access to the EDI system and the fact that he has incentives and the opportunity to
possible order goods and have them shipped to himself, the qualitative aspects of this
evidence demands that the auditor bring these issues to management and discuss the need to
extend the scope of the audit. The auditor might want to consider using generalized audit
software to match EDI shipments with customer billings, to better determine the scope of the
problem.
Exhibit 3: P rojection of M isstatements on EDI P opulation
P rojected
# of Trx
BV n
$ 16,371,095
100%
3,128
Drop Shipments
5,756,077
35%
1,391
11 $
$ 268,985
Shipped to Stores
$ 10,615,018
65%
1,737
19 $ 188,455
80,530
AV n
100% $ 263,762
30% $
76,207
70% $ 187,555
Ratio
M isstatement
$ 16,011,404
359,691
5,447,080
308,997
$ 10,564,324
50,694
15-25
Professional Simulation
Analytical
Procedures
Situation
Internal
Controls
Audit
Procedures
To:
Audit File
Re:
Analytical procedures
From: CPA Candidate
Ratio
Accounts Payable Turn
Days
Inventory Turn Days
Gross Margin
Sales and Accounts
Payable Growth Rates
Unaudited Ratio
27 days
55 days
48%
Sales Growth: 7%
Accounts Payable Growth:
4%
58 days 64 days
42% - 46%
Sales Growth: 6% - 9%
Accounts Payable Growth: 6% 9%
The above analytical procedures show that accounts payable turn days are significantly below
expectations, accounts payable are not growing as fast as expected, inventory turn days are below
the auditors expectation, and gross margins exceed the auditors expectation. In combination it is
likely that there are unrecorded purchases of inventory. The auditor should follow a primarily
substantive approach when performing a search for unrecorded liabilities, with a particular focus on
unrecorded inventories.
15-26
Internal
Controls
Situation
Analytical
Procedures
Audit
Procedures
Assertion
A.
Existence and Occurrence
B.
Completeness
C.
Rights and Obligations
D.
Valuation and Allocation
E.
Presentation and Disclosure
1.
2.
3.
4.
5.
6.
Internal Control
The computer matches the customer number on the voucher with
the customer number on the master customer file.
Only the controller and the assistant controller have the authority
to add a new vendor to the vendor master file.
The computer checks batch totals and run-to-run totals to ensue
that all transactions are processed.
The manager of engine production reviews all purchases charged
to his responsibility center on a weekly basis, reviewing vendors,
amounts, and account charged.
The computer matches the date on the receiving report with the
accounting period when the voucher is recorded.
The computer prints a report of all purchase orders that have not
been received and receivings that have not resulted in the
recording of a voucher.
(A)
(B)
(C)
(D)
(E)
15-27
Audit
Procedures
Situation
Analytical
Procedures
Internal
Controls
Audit procedure
A. Vouch accounts payable credits to supporting vouchers, vendor invoices, receiving reports, and
purchase orders and other supporting information.
B. Obtain an understanding of the business and industry and determine the significance of
purchases and accounts payable to the entity.
C. Inquire of management about existence of undisclosed commitments or contingent liabilities.
D. Trace a sample of cash receipts transactions from cash receipts journal to the general ledger.
E. Vouch debit memos to underlying shipping reports and vendors authorizations.
F. Obtain listing of accounts payable at balance sheet date and determine that it accurately
represents the underlying accounting records by footing the listing and determining agreement
with (1) the total of the unpaid voucher file, subsidiary ledger, or accounts payable master file,
and (2) the general ledger control account balance.
G. Observe the number of the last receiving report issued on the last business day of the audit
period and trace sample of lower and higher numbered receiving reports to related purchase
documents and determine that transactions were recorded in the proper period.
H. Trace dates of paid checks returned with year-end cut-off bank statements to dates recorded.
I. Determine that payables are properly identified and classified as to type and expected period of
payment.
J. Examine subsequent payments between balance sheet date and end of field work, and when
related documentation indicates payment was for obligation in existence at balance sheet date,
trace to accounts payable listing.
Determine the audit procedure that best addresses the following risks.
Risk
(A)
(B)
(C)
(D)
(E)
1.
(F)
(G)
(H)
(I)
(J)
2.
3.
4.
5.
15-28